DeFi indices as a subset of General Crypto Indices
As our team was constructing C100 Crypto Index, we’ve done a thorough research of index products available on the market. Sharing our research with the community.
Crypto Index Space was initially represented by S&P Cryptocurrency MegaCap Index (SPCMC), MV Index Solution and Bloomberg Galaxy Crypto Index (BGCI) composed of major blockchain tokens (proportions ranging from 3% to 40% per each participant). Initially the number of components did not exceed ten, creating an obvious bias in the crypto market value interpretation.
In July 2021 S&P has introduced a BDM Index composed of 240 crypto companies, excluding projects that do not have a proper White Paper (leaving DOGE out of the game). The subset of BDM — a Large Cap Crypto Index by S&P represents top crypto projects by market capitalization. These indices are quarterly rebalanced.
One of the leading investment platforms Bitpanda offers its clients three variants of crypto indices consisting of 5, 10 or 25 largest companies in the industry. E.g. BCI5 consists of Bitcoin and Ethereum (35% each) and Cardano, Solana and BNB tokens (in approximately equal proportion of 10%). Bitpanda rebalances its indices every month.
A Defi index is an example of thematic approach to crypto market evaluation. Even though index composition and component weight differs from project to project, another important characteristic is collateral presence at the index launch. Many crypto indices represent a set of sample prices, i.e. they are informative.
Following DeFi indices are currently available on the market:
One of the core challenge with such indices is disproportion: compilers often allocate too much (up to 40% of weight) to companies that have historically dominated the market (usually BTC and ETH). As a result of the emphasis on blockchain pioneers, companies currently shaping the industry landscape are not represented.
Current DeFi indices, on the contrary have following shortcomings:
- Selectivity: participant composition and proportion selection often lead to broad qualification requirements, thus distorting the index design objectivity.
- Fragmentation: in most cases, the index coverage area is limited to a specific part of the market. That leaves certain relevant companies, involved in market growth, out of focus.
- Inertia: crypto industry (as a new and fast-growing economic sector) is characterized by explosive growth in capitalization of successful projects. For this reason, the list of top companies is constantly being updated, requiring rapid rebalancing.
All these issues have been fully addressed and eliminated during C100 index design. The criteria for project selection and determination of their weight in index composition (market cap calculation and 24h trading volume relative to last month’s total turnover) are aimed to select projects that are of genuine interest to traders and investors. Regular rebalancing of participants and index shares ensures a flexible response to new leaders’ selection and adequate reflection of all current trends in the crypto industry.
